Domestic and International Drivers and Challenges for the Energy Transformation in the MENA Region

Abstract

The chapter examines the domestic and international drivers and obstacles for the transformation in the MENA region. It outlines the major domestic sociopolitical and economic features that could both incentivize and discourage the energy transformation in the region. These are the pervasive role of oil rents, high energy subsidies, high dependence on cheap imported labour force and low role of private sector. The transformation is also pushed by rising international climate pressure but also the need to adapt and mitigate the existing negative consequences of climate change in the region, which are expected to exacerbate the regional fragile environment (e.g. rising temperatures and sea levels as well as water stress and scarcity).

This Chapter focuses on some key socio-economic features of MENA countries and their impact on the energy sector. Both domestic and international drivers for a transformation in MENA countries are analyzed. While being characterized by a great heterogeneity in terms of population, energy and economics, the MENA region presents also some common features that can be considered both drivers and obstacles for the transformation in each country.

Domestically , the pervasive role of oil rents has shaped profoundly the sociopolitical and economic structure of the countries, for example the low role of private sector or the labour market, which depends on cheap imported labour force. Governments see the energy transition as a potential driver for the creation of a more diversified economy, more jobs for their young, growing population. Another key obstacle for the transformation is the issue of (universal) energy subsidies, which encourage inefficient, ramping energy demand growth—mainly based on fossil fuels. Furthermore, the extensive use of fossil fuel subsidies is also responsible for economic and environmental issues. By encouraging the consumption of fossil fuels, countries face a growth in emissions with negative impacts on the environment. Moreover, they also affect macroeconomic aspects with oil-importing countries facing high energy import bills and oil-exporting countries experiencing an erosion of hydrocarbon export volumes. Reforming fossil fuel subsidies remains quite challenging as they are a key pillar of the social contract. For these reasons, governments need to pursue a holistic approach in reforming their economies and societies as energy transformation will require a multidimensional reforming process given the deep link between society and oil.

Additionally, there are international factors that incentivize and induce energy transformation in the MENA region. Firstly, the global commitment towards the fight to global warming contributes to encourage the transformation in the region. Growing international pressure has increased and MENA countries have started to announce their own ambitious climate pledges. Since 2021, a group of MENA countries, mainly located in the Gulf, have pledged to net-zero targets by and around mid-century. This is driven by international pressure but also the need to adapt and mitigate the existing negative consequences of climate change in the region, which are expected to exacerbate the regional fragile environment (e.g. rising temperatures, sea levels as well as water stress and scarcity). The exposure to such climate developments encourages MENA governments to consider energy transformation through the deployment of renewables in order to reduce their climate footprint and reduce negative climate consequences both regionally and globally. Lastly, MENA countries have considered possible measures to transform their energy and economic model in order to adapt to the upcoming reduction in global oil and gas demand due to the global energy transition in light of the International Energy Agency’s scenarios.

The need to transform the oil-based socioeconomic and energy model of MENA countries is the subject of periodic debate. Indeed, oil rents, accruing directly to the states from the rest of the world, have shaped the region’s political economy and sociopolitical structure. The evolution of this region, and its socioeconomic development, are deeply interlinked with the evolution of oil revenues, which depend on the volume of exports and on the trends in oil prices. Since 1970, numerous scholars (e.g. Mahdavy 1970; Beblawi and Luciani 1987; Beblawi 1987; Anderson 1987; Gray 2011; Herb 2005; Luciani 2019) have extensively analyzed the effects of (oil) rents on the MENA region and its political economy, under the paradigm of the Rentier State Theory.

Today, MENA countries have to face several challenges, notably weak private sectors, high unemployment rates, low productivity, and autocratic regimes. All of these issues are a result of the region’s economic structure, which is based on an overdependence on unearned and external income streams (the so-called “rents”).

This domestic aspect is not the only driver for the region’s transformation. In recent years, climate change and the fight against global warming have become key issues in the international political debate. Countries have steadily created an international climate change regime to mitigate and adapt to the effects of global warming. To achieve the international climate targets set by both the international community and national governments, the world’s economy needs to undergo a drastic change, and to move away from fossil fuels and the resulting peak in oil demand. This poses a dual challenge for MENA countries: the need to reduce their energy dependence on polluting energy sources, while finding alternatives to (unabated) fossil fuels exports for governmental revenues.

This chapter presents the common challenges and features of the rentier state in an energy and economic perspective to better understand what drives and/or hinders the energy transformation of the MENA region. It also addresses the international drivers, namely the international climate change regime and the fight against global warming.

1 The Role of Oil Rents: Economic Dependence

In MENA countries the hydrocarbon sector accounts for large shares of their revenues and exports, playing a pervasive role in their economy. In 2019 the hydrocarbon sector accounted for 70% of exports revenues and 50% of GDP in Saudi Arabia, and it covered 92% of exports revenues and 40% of GDP in Kuwait (OPEC 2019).

Table 2.1 highlights the conspicuous oil and gas rents of numerous MENA countries. The rent is here defined as the export revenues minus the production/export cost. The export revenue is the product of export volume and export price. The economic dependence on oil revenues is increasingly visible as oil prices rise. Throughout the last cycle of oil prices (2000–2014), hydrocarbon rents in percentage of GDP increased in all countries. Major Gulf oil-producing countries are the ones with the highest oil rents, with the exception of Iran. International sanctions have drastically hindered Iran’s ability to export hydrocarbons and collect their rents, stressing the need to find new solutions to diversify Iran’s economy (e.g. agricultural products). In North Africa, Egypt has reduced its dependence on oil rents thanks to two major revenue sources: tourism and the Suez Canal fees.

Table 2.1 Oil and gas rents (% of GDP) and Brent oil prices ($/barrel)

Due to the high dependence of MENA countries on oil revenues, economic diversification is a major political issue, fueling numerous analyses and debates. However, countries need to deal with the cyclical evolution of oil prices. While low oil prices force countries to diversify, high oil prices make economic diversification more challenging. With high oil prices, every dollar invested in the hydrocarbon sector generates a much higher return than a dollar invested in non-hydrocarbon sectors. At times of growing oil prices, economic diversification may well be taking place, but it is obscured by the inflation of value added in the oil sector. By contrast, when prices decline, diversification becomes more visible (Luciani 2019).

The relationship between hydrocarbon revenues and national budgets represents a concern if governments do not put in place an adequate response to tackle volatile revenues. Indeed, hydrocarbon revenues fluctuate depending on oil price cycles. In 2018, the IEA’s Special Report on Oil Producing Economies (2018) pointed out that MENA countries have too often implemented their spending plans on the basis of current oil prices, meaning that government expenditure rises while prices are high and comes down when they fall. This “pro-cyclical” approach has jeopardized the region’s fiscal and financial sustainability. It is difficult to reverse expansionary policies, implemented when oil prices are high, with austerity policies enforced when oil prices are low, given the social contract in place in the region. When the price of oil dropped in 2014, fiscal issues emerged as the oil prices were no longer able to satisfy the countries’ fiscal breakeven oil prices,¹ summarized in Fig. 2.1. Fiscal breakeven oil prices, which are driven by budgetary expenditures, have been well above the market oil price in most MENA countries.

Fig. 2.1

Source Authors’ elaboration on IMF

Fiscal breakeven oil prices for selected MENA oil exporting countries (US$/b).

A short-term solution to offset the volatility of oil prices and revenues is to draw financial resources from the financial reserves. Some of the oil-exporting countries have managed to enhance their financial reserves when the oil prices were high. Nonetheless, particularly after the 2014 oil price drop, these countries had to use their resources to keep their welfare state running, while preventing social unrest. The result is that the financial reserves of countries such as Algeria and Iraq eroded significantly over the course of a few years. For example, in 2013 Algeria had a record of $195 billion of foreign reserves, which started to drop rapidly in 2014. In 2020, Algeria’s foreign reserves stood at slightly above $59 billion and at this rate it is expected that they will be gone in 2022. Also Saudi Arabia had to resort to drawing from its financial reserves, which peaked at over $730 billion in 2014 and had fallen by some 30% by 2017 due to low oil prices (IEA 2018). In 2020, Saudi Arabia’s reserves stood at $472 billion.

In this context, MENA countries have consistently announced diversification plans and strategies. Call for economic diversification are not new in the region; Saudi Arabia expressed its intention to diversify its economy away from oil revenues in its first National Development Plan back in 1970. As oil prices collapsed in 2014, economic diversification gained a new momentum. Moreover, economic diversification is also dictated by the medium and long-term forecasted decrease in global oil demand, rather than oil reserves depletion, due to the increasing relevance and efforts of decarbonization policies worldwide and international conventions (i.e. UNFCCC, United Nations Framework Convention on Climate Change). Following the publication of the Paris Agreement in 2015, McGlade and Ekins (2015) have estimated that roughly 40% of oil reserves in the MENA region will not be exploited. According to the IEA’s Sustainable Development Scenario, where oil demand is forecasted to peak in the 2030s, hydrocarbon exporters are expected to lose between 25 and 40% of their revenues compared to the reference scenario (IEA 2020). Thus, MENA countries have considered enhancing the use of renewable energy sources in order to foster economic diversification. However, the all-pervasive role of oil and gas in the energy and economic structure of several MENA countries represents a significant barrier to the development of renewable energy sources.

2 The Prevalence of the Public Sector and Cheap Labor

The public sector is a key pillar of the social contract in line with the rentier mentality present in the region. Indeed, the share of people employed in the public sector in the MENA region is far higher than in most other regions in the world: 14% in Morocco, 17% in Iran, 19% in the UAE, 20% in Qatar, 21% in Syria, 25% in Egypt, 26% in Kuwait, 30% in Iraq, 32% in Algeria, 32% in Palestine, 38% in Saudi Arabia and 40% in Jordan. These percentages are higher if only the nationals are taken into account, especially in GCC (Gulf Cooperation Council) countries, since they are home to a high number of expats with all levels of skills, even outnumbering nationals in some cases. Since the first oil boom, increasing numbers of foreign workers flew into oil-rich countries. Now, migrant workers constitute the majority of the workforces in all Gulf countries, ranging from 53% in Saudi Arabia to 94% in the UAE (Mehlum et al. 2016). However, expats predominantly work in the private sector, in line with the Kafala migration policy.² Depending on the country, the public sector jobs were attributed only to nationals (i.e. GCC countries), or to those who had successfully attained a certain level of education (i.e. Tunisia and Egypt) or to those who belonged to tribes deemed essential for political stability (i.e. Jordan).

The lack of a developed private sector, and the reliance on public sector employment for political and stability purposes, has serious and damaging consequences on the economy of MENA countries. The reliance on public sector employment for political purposes and stability undermines the labor productivity of MENA countries since jobs depend neither on performance nor on achievements.

These two elements are the main reason for the low labor productivity expressed as the value added per employed worker in oil-producing MENA countries. The creation of numerous public sector jobs has not added significantly to economically productive activity. A large gap in average wages between the private and public sector contributes to the greater attractiveness of the public sector at the expense of the private sector. For example, across the GCC countries, the gap between average public and private wages is often between 150 and 250% (IEA 2018). The differences in labor productivity are particularly stark when comparing hydrocarbon-producing economies in the Middle East and North Africa with other countries in the region that import oil and gas.

This is because the private sector is motivated by the minimization of the cost of labor, accepting lower skills and qualification for the sake of lower wages. The meaning of declining productivity is that economic growth is achieved exclusively by increasing the number of expatriates. Overall, the structure of labor markets in the MENA region, especially GCC countries, is inadequate to enhance the competitiveness of the private sector, since it relies on the availability of cheap foreign labor rather than up-front technological investments, because of lower production costs. Oil-exporting countries in the MENA region enjoy cheap labor; however, this condition creates little incentive to invest in machinery that may improve labor productivity. Generally, machinery and technology require higher skills awarded with higher wages.

The expansion of the public sector also threats budgetary sustainability. For example, in Iraq the public sector has grown from 1.2 million employees in 2003 to around 3 million in 2018, posing a serious challenge to the state budget. Indeed, in 2016 Iraq spent over $30 billion in salaries, corresponding to 60% of the country’s net income from oil and gas that year (IEA 2018). This context worsened due to the changing demography at the beginning of 2000s, when the MENA region experienced the so-called “youth bulge”. Having one of the youngest populations in the world, the MENA region has failed to create enough jobs for its ever-growing youth, resulting in a high rate of youth unemployment. Indeed, the region experiences one of the highest youth unemployment rates in the world, totaling an average of 30% in 2017 with respect to a world average of 13%, with however large differences across countries. Some of the highest youth unemployment rates (15–24 years old) in the region in 2019 have been registered in Palestine (37%) with Gaza at 61% (World Bank 2020), Jordan (37.2%), Tunisia (35.8%) and Saudi Arabia (30%) (World Bank 2021).

The use of the public sector for job creation has limits. In some cases, the share of public sector jobs declined, with the most prominent decrease in Egypt (from 35% in early 2000 to 21% in 2017). However, with the outbreak of the “Arab Spring”, other countries, mainly the UAE, Jordan, Morocco and Tunisia, have substantially increased the share of employment opportunities in the public sector, on top of giving direct transfers to people as lump sum payments (i.e. KSA). Moreover, to counteract the protests, GCC countries also offered generous packages to public sector employees, among which a substantial increase in wages (the UAE and Qatar increased wages by between 50 and 120% in 2011). At the same time, however, the MENA region did not develop a private sector that would absorb the demand of jobseekers, given the reduction of opportunities in the public sector of most MENA countries.

3 Energy Subsidies: A Pervasive and Unsustainable Role

Another crucial aspect of MENA countries is low energy prices due to subsidies. Tom Moerenhout (2021) explains the rationale of low energy prices in the GCC countries (also true for other MENA countries) and why it is extremely difficult to pursue an energy pricing reform in this area. There are principally three reasons that undermine any energy pricing reform: (i) the central role that these subsidies play in welfare protection and distribution; (ii) the important role they play in industrial policy and economic development; and (iii) the political dimension and the social contract.

First, pricing policies in the MENA region are a key component of the social contract. The government, which is the main receiver of oil rents, is responsible for allocating and redistributing wealth. Low oil prices are one of the components of such a welfare state. Without any other changes in political representation and other social aspects, an increase of energy prices would represent a unilateral alteration of the social contract. Second, low oil prices can be used as a powerful industrial policy. They can promote and foster economic development and sustain specific industrial sectors and their competitiveness. For example, industrialization in energy-intensive sectors (e.g. petrochemicals, cement, aluminum and steel) has been a key aspect of GCC countries’ industrial policy. Third, low energy prices are considered an instrument to preserve power and control through systems of patronage and rentierism. Given the crucial role played by energy subsidies in social and political stability, implementing pricing reforms is often politically costly and can threaten political stability.

Energy subsidy: lack of agreement on common definition and approaches

As of today, energy subsidy does not have a precise definition as international organizations and countries attribute different meanings to this term, albeit with many common elements.

There are fundamentally two approaches. On the one hand there is the opportunity cost approach (for instance measuring the subsidy as the difference between the domestic price and the international price (or even a domestic market price) of a commodity, and on the other hand there is the supply cost approach (thus comparing the price of a commodity to the cost of supplying it to the customers).

With regard to the opportunity cost approach, a widely used definition proposed by de Moor and Calamai (1997), defines a subsidy as “any measure that keeps prices for consumers below the market level or keeps prices for producers above the market level or that reduces costs for consumers and producers by giving direct or indirect support” (de Moor and Calamai 1997).

The problem with this definition is that it is sometimes difficult to define what the benchmark market (and thus price) is, in particular when a commodity is not (or cannot be) internationally traded as is the case for electricity, but often also for natural gas if it is only used domestically, and the conditions for a functioning domestic market price formation do not exist (for instance due to a monopolistic supply structure). There exists a large literature of energy commodity pricing in the presence of a monopolistic supply structure (Percebois 1999). Fundamentally, in this case, the Government (or Regulator) should set the price to be as low as possible for consumers in order to maximize the socio-economic development of the country, but high enough to incentivize suppliers to invest in a reliable supply. In this case, a subsidy exists if the price of the commodity is below the long run marginal cost of supplying that commodity to the domestic market (the term “long run” implies that future investment needs have to be incorporated in the tariff structure) in the case of increasing cost curves (the case of most production activities) and in any case guaranteeing the profitable operation of all operating companies (example transmission and distribution which have decreasing cost curves).

In the international literature, all too often subsidies for countries are calculated using the opportunity cost approach even though there may be good reasons to price a commodity below opportunity cost but above cost of supply. These reasons may be due to the fact that (a) the aim of a state-owned energy commodity producer is not to maximize its own profit but to foster the socio-economic development of the country, (b) international market prices are very volatile and not significant for the development of the domestic market, (c) there is no connection between the local market and the international markets of a specific commodity.

Whatever approach is used, two types of energy subsidies implementation forms can be identified: explicit and implicit. Explicit subsidies are the transfers written in the state’s budget that the government gives to energy producers or consumers. Implicit subsidies, less transparent and more difficult to calculate, usually take place in oil producing countries with vertically integrated utilities, where the tariffs for consumers cover the production costs but are below international benchmark prices. In this way, the utility does not incur in losses and the government does not make explicit transfers to neither consumers nor producers (El Katiri and Fattouh 2015).

Having in mind these three aspects, it is clear how energy subsidies are a key socio-economic pillar of rentier states and more broadly of the so-called “social contracts” of most countries in the region. They are at the center of socio-economic stability and one of the few tools of social welfare systems in most other countries, especially before the 2011 Arab Spring and the decline of oil prices in 2014. For instance, some subsidy system reforms targeted specific energy sources, including petroleum subsidies in the case of the UAE at the federal level, and fossil fuel subsidies in the case of Jordan. On the other hand, few countries have been unable to implement energy subsidy reforms, mostly due to internal political struggles, as in the case of Algeria and Lebanon. Overall, Iran carried out one of the most comprehensive subsidy reforms in the MENA region, especially for an oil-producing country. This reform kicked off in 2010 and its main peculiarity concerned a universal cash transfer system (El Katiri and Fattouh 2015). Also, Egypt reduced the level of energy subsidies after the Arab Spring, and in 2014 it carried out a comprehensive energy subsidy reform, which also included measures to offset the negative impact of the reform on the most vulnerable households (through food subsidies and cash-based transfers) (Breisinger et al. 2019). Thus, contrary to Iran, these measures did not target the whole population. The following Figs. 2.2, 2.3 and 2.4 highlight the extent and economic burden of subsidies and the differences among MENA countries, both in absolute terms and as a share of GDP.

Fig. 2.2

Source Authors’ elaboration on IEA data

Fossil fuel subsidies in 2019 (real 2019 US$ billion).

Fig. 2.3

Source Authors’ elaboration on IEA data

Total subsidies as a share of GDP in 2019 (%).

Fig. 2.4

Source Authors’ elaboration on IEA data

Subsidy per capita in 2019 ($/person).

The sharp decline of oil prices in 2014 urged MENA countries to reconsider energy subsidy reforms to curtail the major drawbacks of this subsidy system. First of all, energy subsidies may seriously contribute to worsening macroeconomic conditions, in particular in those importing countries that guarantee to their citizens a lower price of the commodity than its import and distribution cost. This either requires other sectors to cross subsidize this commodity or it requires increasing the country’s debt. Also, energy subsidies may hinder the efforts of energy mix diversification within the broader economic diversification framework. Indeed, energy efficiency measures are unlikely to be successful in a high energy subsidy environment and the introduction of renewable energy also becomes more challenging. Moreover, subsidized prices make energy utilities dependent on subsidies given by the government to keep their operations running, otherwise, they are not likely to be able to cover their operating costs. For highly indebted countries, such as Lebanon, the transfer of subsidies to the power company EDL is highly inefficient and costly. Also, contrary to Europe, numerous countries in the region (e.g. Lebanon, Syria and Egypt) have adopted the so-called cross-subsidization, whereby residential energy tariffs are below cost level tariffs while industrial tariffs are above the cost levels in order to offset the difference. Higher tariffs for industries adversely affect the efficiency and the competitiveness of this sector and distort consumption. Lastly, energy subsidies in some cases are also regressive, which is a major disadvantage in a region where 20–40% of the total population is considered multidimensionally poor (Sida 2019). This is because energy subsidies can sometimes represent a major handout to the middle and upper classes and to the wealthy that can easily afford to consume more energy. Therefore, it is crucial to reform energy subsidies in order to shift from universal subsidies and, at the same time, guarantee targeted subsidies to preserve and protect lower-income classes.

Since 2014, some countries have put in place some energy pricing reforms, undertaking different strategies and implementation timelines, as shall be discussed later in the following chapters. Nonetheless, energy subsidies are still widely used in these countries, incentivizing energy demand and representing a barrier for the deployment of renewable energy sources as well as energy efficiency.

From an energy perspective, low energy prices encourage domestic energy demand, including fossil fuels. As some MENA countries are large oil and gas exporters, a growing domestic energy consumption poses a direct threat to the socioeconomic model based on the revenues from oil rents. Indeed, higher domestic consumption erodes potential export volumes, which are vital for the governments’ coffers. Indeed, the region’s energy mix is highly dependent on fossil fuels with little diversification of sources, with a few exceptions (e.g. Morocco is also reliant on coal while Egypt on hydro). Figure 2.5 highlights the high reliance of numerous countries in the MENA region on fossil fuels and the relatively little diversification of their energy mix.

Fig. 2.5

Source Authors’ elaboration on BP (2022)

Primary energy consumption by fuel, 2021.

As occurred with natural gas over the last few decades, MENA countries have now turned to renewable energy sources in order to free additional oil barrels for exports. Thus, diversification of the energy mix from fossil fuels has become a priority for the great majority of countries in the region and the need of economic diversification has increased for the oil-exporting ones. On the other hand, resource-poor countries are striving to diversify their energy mix in order to be less affected by oil price volatility and to ensure a balanced energy trilemma (energy security, affordability and sustainability).

4 Growing Domestic Energy Demand and Water-Energy Nexus

All MENA countries need to satisfy their rising energy demand. Thus, growing domestic energy demand may be seen as a major driver for MENA energy transformation. These countries have experienced strong energy demand growth rate throughout the last decades. The MENA region’s primary consumption expanded from 299 Mtoe in 1990 and 1024 Mtoe in 2019, i.e. an average growth rate of 4.3% per year. At the country level, Iran and Saudi Arabia are the two largest consumers in the region accounting for almost half of the region’s total primary energy consumption in 2019. This growth is almost entirely satisfied by fossil fuels. More in detail, MENA countries, in particular Gulf countries, consume far more oil per capita compared to developed countries. In 2019, Gulf countries consumed between 37 and 45 barrels per capita, twice the US and even four times the EU (Fig. 2.6). Growing energy demand, and in particular high oil consumption rates, have increasingly forced MENA countries to consider energy transformation since becoming large fossil fuel consumers erodes directly the main income source for governments (i.e. oil export volumes).

Fig. 2.6

Source Authors’ elaboration on BP, UN DESA

Oil consumption per capita in selected countries in 2019, (barrel per capita in a year).

Energy demand is expected to continue to increase in the following years mainly driven by population growth, economic expansion and industrialization plans. However, there are also other less human-driven causes that will eventually exacerbate the general trends: climate change and water demand. Water scarcity is a common feature in the MENA region. Out of the 17 most water-stressed countries in the world, eleven³ are in the MENA region. Economic growth, population growth, the consequent rise in food and energy demand, are contributing to an increase in water demand. Moreover, agriculture plays a major role, accounting for 90% of overall water use—compared to a global average of 70% (UNICEF 2021). Unsustainable water abstraction and groundwater development stress cause an irreversible depletion of groundwater resources in the MENA region. Furthermore, MENA water resources are characterized by a high dependence on transboundary waters, often shared by more than one country. 60% of surface water resources in MENA are generated outside the region with the region having three shared river systems (UNICEF 2021). Moreover, all countries in the area share at least one aquifer with a neighboring country. In this context, a strong cooperation policy is crucial to avoid free riders and potential water-related conflicts or tensions. Climate change is expected to further exacerbate the existing weaknesses in the water sectors.

To address all these challenges, MENA countries have increasingly invested in desalination plants. Currently, almost half of the global desalination capacity is located in the MENA region (48%), with three Gulf countries (Saudi Arabia 15.5%; the UAE 10.1%; and Kuwait 3.7%) being major producers in the area and globally. In terms of technology, the Middle East is an exception as it heavily relies on fossil fuel-based thermal desalination—the Middle East, led by the UAE and Saudi Arabia, accounts for roughly 90% of the thermal energy used for desalination worldwide. By contrast, the most common desalination systems installed worldwide are based on membrane technologies that use electricity, such as reverse osmosis. However, the Middle Eastern countries exploit the availability of cheap oil and gas and the prevalence of co-generation facilities for power and water. Thus, two-thirds of the water produced from seawater desalination in the region is from fossil fuel-based thermal desalination, even though the use of membrane technologies is expanding in the region. The rest is from membrane-based desalination that, however, relies on electricity produced using natural gas.

Growing water demand, expansion of desalination capacity and its overdependence on fossil fuels further increase energy—and more precisely fossil fuels—demand in the region. These trends are forcing MENA countries to transform their energy systems in order to satisfy the expansion of the demand side, while preserving a certain amount of fossil fuels for exports, which are currently vital for governmental revenues.

5 Rentier State and Governance: The Consolidation of Rulers

The idea that oil (rent) has hindered democratic developments in the region is widespread both in the academic sphere and in the media outlets, even if it may be controversial. It has often been stated that oil prevented democratic development in this region. In a rentier state, citizens are exempted from tax collection as the government enjoys financial independence by accruing revenues from oil rents. This provides a significant autonomy to the state. Citizens are less eager to request political participation as they do not need to pay taxes. As history teaches, democratic requests arise when taxes are imposed—and often increased—as occurred with the French Revolution. What is certainly true is that oil rents have contributed to the consolidation of regimes that would otherwise have faced serious challenges in the following decades. Especially in the Gulf, oil has indeed cemented power in the hands of the existing ruling families. Indeed, very few countries were democracies when oil rents began to flow into the governments’ coffers. Furthermore, the great strategic relevance that oil gained after World War II prompted a major extra-regional involvement in the protection of the ruling families, in particular those who were in favor of Western countries.

The absence of income taxes represents a pillar of rentier economies. However, it hampers these countries’ sustainability as they are fiscally dependent on oil revenues. Rentier economies in the region have increasingly considered to expand taxation, although it may weaken the existing social contract between citizens and their rulers. Some countries have gradually introduced VAT, such as the UAE and Saudi Arabia in January 2018, and even increased it (Saudi Arabia from 5% up to 15% in July 2020). Setting out taxes and energy subsidy reforms has to be a gradual process and has to be accompanied by the introduction of other benefits and social safety nets in order to maintain social stability and the political status quo.

The need of transforming energy and socioeconomic systems may contribute to modify the current political status quo. In the past years, MENA countries have rolled out some reforms, reducing energy subsidies. Governments’ and ruling elites’ ability to preserve stability and security, while implementing the transformation, will be of paramount importance. In some cases, retracting unsustainable benefits may result in streamlining and strengthening political structures (Krane 2019).

6 External Drivers and Challenges

MENA countries are also forced to change their energy and socioeconomic model due to external factors, namely the fight against climate change and the global rush towards a low-carbon economy. Despite their population sizes, MENA countries are major oil and gas consuming countries, and are responsible for an important share of global GHG emissions. Thus, MENA countries can play a crucial role in achieving international climate targets. In the foreseeable future, growing political pressure on these countries may put under strain their dual nature of large oil and gas producing and consuming countries.

In short, the primary external drivers of MENA energy transformation are climate change and the consequent higher political consensus that entails a tighter acceptability of fossil fuels. Over the last decades, a general consensus on the urgency to address climate change, global warming and its negative consequences has emerged worldwide. Political commitment spans from national to supranational level via sub-national institutions as well as the private sector. Such ever-growing political consensus on decarbonization and the fight against climate change is one of the major drivers for the MENA countries’ energy transformation. However, the pathway of climate policies—both at the international and regional level—has been long and not without some speed bumps. This section aims to provide an historical overview of the creation of the international climate change issue, assessing the domestic side of the key external driver (i.e. climate change) for energy transformation in the region.

6.1 The International Climate Policy and Regime

Countries and governments across the globe are increasingly considering climate change a top priority in their political, economic and social agenda. An international climate change policy regime has emerged throughout the last decades, becoming one of the key external drivers for MENA countries to pursue energy transformation. Before moving to the formation and evolution of the international climate change regime, which inevitably stimulates the process of energy transformation in MENA countries, it is important to highlight a few general features of such regime.

First, the regime has aimed at the widest possible participation and consensus given the global nature of the climate change and GHG emissions issues (Bodansky and Rajamani 2016). However, in the last two decades, this aim has been undermined by growing international awareness and urgency, leading to higher policy demands. The obstructionism from major oil producing countries or the US decision to not join the Kyoto Protocol and the withdrawal from the Paris Agreement in 2017 are only some examples. Second, the regime exemplifies the ‘framework convention/protocol’ approach to international environmental law (Idem). As we shall see, the UNFCCC established the basic framework for the climate change regime, on the basis of which the Kyoto Protocol specifies obligations and mechanisms for emissions reduction by developed countries. Also the Paris Agreement created a framework based on the UNFCCC but with a different approach compared to that of the Kyoto Protocol, as we shall see. The third general feature of the international climate change regime is the inevitable consequence of the multidimensionality of the issue. Tackling climate change requires an extraordinarily broad scope that encompasses not simply environmental protection but also economic and development policies (Idem). Lastly, the international regime is largely neutral regarding policy options, meaning that states have significant flexibility in designing strategies to deal with climate change in terms of both mitigation (Kyoto Protocol) and adaptation (UNFCCC and the Paris Agreement) (Idem).

The formation of the international climate regime has undergone several phases over the last six decades. While the initial interest for climate change was purely scientific, in the 1980s and 1990s a shift occurred, making climate change a political issue. Since then, governments have become increasingly involved in the political process to tackle climate change. The shift took place slowly but steadily, also thanks to the development of technological capabilities that allowed the investigation of the consequences of climate change.

In the late 1970s, the World Meteorological Organization (WMO) began to express concerns over the possibility that human activities—in terms of carbon dioxide emissions– might contribute to the serious warming of the lower atmosphere. Political and public concern on global warming grew over the 1980s, and in 1988 the WMO and the United Nations Environment Programme (UNEP) established the International Panel on Climate Change (IPCC) to investigate and report on the scientific evidence of climate change and on possible international responses to climate change.

In the early 1990s governments set the basis for the creation of the international climate regime. This phase resulted in the adoption and entry into force of the UNFCCC, following the 1992 “Earth Summit” in Rio de Janeiro. Moreover, throughout the 1990s and the early 2000s, the international community worked consistently on the 1997 Kyoto Protocol and its implementation. Climate change thus steadily became a major political issue both domestically and internationally. But it was in the 2010s that the international community really focused its political attention on the issues of climate change and the need to reduce GHG emissions, also pushed by public concerns and scientific knowledge.

In 2015, the international community established a key milestone with the Paris Agreement. The 2015 Agreement aims to limit global temperature to well below 2 °C, preferably to 1.5 °C, compared to pre-industrial levels. Moreover, with the Paris Agreement, countries aim to low-carbon development. Three years later, the publication of the Special Report of the IPCC on Global Warming of 1.5 °C was a further call for decarbonization actions, claiming that achieving the 1.5 °C objective will require a significant drop in GHG emissions of about 45% already by 2030 and zero net emissions in 2050. Meanwhile, the UN also adopted Sustainable Development Goals (SDGs), reiterating the need for a sustainable development in order to combat climate change and its impacts while ensuring access to affordable, reliable, sustainable and modern energy for all.

In essence, governments worldwide have steadily participated in a series of meetings with the specific goal to address and tackle climate change collectively. The process, however, which is far from being complete, has been gradual and not without setbacks (e.g. political obstructionism and withdrawals from agreements). Nonetheless, each of these international agreements was the result of prolonged negotiations and discussions, contributing to the formation of the current political consensus over climate change and decarbonization.

The first step was the establishment of the UNFCCC with the 1992 Earth Summit in Rio de Janeiro. It identified “the stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system” as its ultimate objective. Moreover, the UNFCCC framework also established two specific principles of the international climate regime: the “precautionary principle” and the principle of “common but differentiated responsibilities”. These two principles affirmed that political action should not be postponed by a lack of full scientific certainty and the richer countries (higher emitters) should bear the biggest burden in terms of mitigation, while poorer countries (lower emitters) should be able to increase gradually their emissions to a threshold sufficient to reach economic and social development (Van de Graaf and Sovacool 2020). What is crucial is that the UNFCCC framework is a political consensus among all countries, including traditionally more conservative ones (e.g. OPEC and Russia). Its adoption in 1992 and its entry into force in 1994 were aided by the absence of any legally binding targets to reduce GHG emissions.

With the Kyoto Protocol in 1997, countries worldwide translated into concrete targets, objectives and timelines that they had identified as principles in the UNFCCC framework. According to the Protocol, developed countries had to reduce their emissions by 5.2% below the 1990 baseline by 2012 (Van de Graaf and Sovacool 2020). The Protocol established also some flexible mechanisms, allowing developed countries to reach their reduction targets through alternative ways rather than mitigating emissions domestically. A flexible measure was the Clean Development Mechanism (CDM), which allowed developed countries to invest in clean projects in developing countries obtaining carbon credits in return. The Protocol also set the Joint Implementation (JI) which is similar to CDM with the difference that it applies to projects in other developed countries, such as Central and Eastern European countries. Moreover, it also introduced the possibility of emissions trading. The idea behind these mechanisms was that emissions should be reduced where it is most economical to do so (Van de Graaf and Sovacool 2020).

However, the Kyoto Protocol is generally regarded as a failure for several reasons. Firstly, it took almost eight years before entering into force, illustrating the challenging and difficult evolution of the international climate regime. The Protocol faced some major opposition, particularly from the US. The US did not join because of US Congress’ reluctance for a treaty that put carbon limits on the US economy but not on China. Russia’s ratification in 2004 made it possible for the Protocol to finally enter into force in 2005. Secondly, it focused on developed countries, appeasing flexibility demands of the developing countries for their social and economic development. However, by creating such stark differences between developed and developing countries, the Kyoto Protocol failed to account some of the world’s largest emitters (e.g. China), but developing countries in general, which were not willing to stifle their economic development by emissions reduction targets. Moreover, the Kyoto Protocol did not produce the right conditions to incentivize climate policies at the national level; those countries that remained committed to addressing climate change were mainly motivated by domestic considerations rather than international obligations.

The 2015 Paris Agreement was a pivotal moment for global climate and energy policy. As Yergin states in his latest book “The New Map”, the relevance of the Paris Agreement in international climate change policies is remarkable. There are two “eras” in climate policy: “before Paris” and “after Paris” (Yergin 2020). After years spent in seeking a post-Kyoto agreement, the world’s countries gathered at UN COP21 in Paris achieving an agreement in December 2015, pledging to “hold the increase in the global average temperature to well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 °C above pre-industrial levels”. The Agreement entered into force only 11 months after it was signed, highlighting a major political consensus compared to the Kyoto Protocol. The Paris Agreement diverges consistently from the Kyoto Protocol also on the universal application of its targets: all countries—not only developed ones—need to participate in climate actions, producing national plans on how to reduce emissions. Each country produces and presents the Nationally Determined Contributions (NDCs), which are thus unilateral, voluntary pledges. This aspect was a remarkable difference compared to the Kyoto Protocol. The voluntary pledges are a domestic product rather than a multilateral negotiation, allowing countries to overcome major barriers to previous international cooperation on climate change. Firstly, it accepted the reluctance of most major emitters to tie themselves into a rigid set of predetermined emissions reductions that are legally binding. This avoided a situation with the US similar to the one following the Kyoto Protocol. Secondly, it did not envisage a fair burden-sharing arrangement as part of a comprehensive international agreement, compared to post-Kyoto climate negotiations. Under the Paris Agreement, each country presents and submits an emissions reduction plan. Nevertheless, the voluntary nature of the NDCs raises the issue of compliance and whether these plans are actually carried out by national governments. Regarding this issue, the Agreement establishes a common transparency and accountability framework and an iterative process in which parties take stock, every five years, of their collective progress and put forward emission reduction contributions for the next five-year period (Bodansky and Rajamani 2016). Bodansky and Rajamani (2016) affirmed the Paris Agreement represents the culmination of three major shifts in the climate change regime in relation to multiple issues, namely (1) the architecture of the regime, (2) differentiation between developed and developing countries, and (3) the legal character of commitments.

The Paris Agreement also envisages a broader climate action going beyond the state level, seeking to embrace explicitly climate action by sub- and non-state actors. Although climate actions at these levels were already present, the Paris Agreement enhanced them with the result that these non-national climate actions gained prominence (Van de Graaf and Sovacool 2020). In sum, the Paris Agreement set and crystallized an emerging hybrid architecture, in which bottom-up substance to promote participation is combined with a top-down process to promote ambition and accountability (Bodansky and Rajamani 2016). As of today, 189 states have joined the Paris Agreement (the USA rejoined the Agreement in February 2021) (Table 2.2).

Table 2.2 Major milestones of the international climate change regime

6.2 The MENA Region, Climate Change and Policy: The Domestic Dimension

Notwithstanding this international context, MENA countries are pursuing, at different paces, the transformation of their energy sector not only as a reaction to the international pressure and climate change policy, but also as a result of domestic considerations. These countries are already experiencing the negative effects of climate change such as growing GHG emissions, rising air and water temperatures, water scarcity, desertification, and so on. However, although MENA countries have been on the front line of climate change, they have also had a challenging relationship with global warming and with the resulting climate policy.

The first and immediate consequence will be the rise of air temperature, which has already repeatedly broken records in recent years. In 2016, the highest recorded temperature in the region was 54 °C in Kuwait, while in the same period, Basra in Iraq recorded 53.9 °C. As air temperatures rise, the countries’ energy demand will rise too, particularly in the cooling sector. This will trigger a further increase in energy consumption (also due to subsidized energy prices), threatening oil exports and governments’ revenues.

The growing temperature also affects water availability. The MENA region currently faces a general water scarcity, being the world’s most water-stressed region. If the MENA region is endowed with 52% and 42% of the world’s oil and gas proven reserves, it is endowed with as little as 1% of global renewable freshwater resources. Over 60% of the population of the MENA region lives in areas of high or very high water stress, compared to some 35% for the rest of the world (World Bank 2022). Climate change will inevitably worsen this challenging condition, harming regional growth prospects. It is estimated that the negative impact of water scarcity on GDP growth in the MENA region ranges between 6 and 14% of GDP reduction. Also regarding water scarcity, MENA countries may resort to desalination plants, which are energy-intensive and almost entirely powered by fossil fuels in the region. MENA countries are also on the front line of climate change as several regional cities, located on the coast line, are imperiled by rising sea levels. Moreover, climate change will also affect food production, which could lead to a general increase of food prices. This would further challenge MENA countries economically, since this area is one of the most important food dependent regions.

Despite its exposure to climate change, the MENA region has always had a “conflictual” approach to the issue of climate change, with special reference to the major oil and gas producing countries in the Gulf (Luomi 2020). Over the past ten years, climate change has gained an increasing attention in the region, as a result of the increasing focus on this issue worldwide. Nevertheless, it is crucial to reiterate that also regarding climate change the MENA region is far from being a homogeneous group, despite its exposure to global warming and its consequent fragility. The political consideration and commitment to address the issue diverges widely across the region. On one side of the spectrum, there are countries like the UAE and Morocco, which have increasingly invested in building a reputation as climate and clean energy leaders in the area. The decision to locate the new headquarters of the International Renewable Energy Agency (IRENA) in Abu Dhabi illustrates the Emirates’ political commitment to position themselves at the center of the climate policy map. Morocco has enhanced its commitment to climate and low-energy targets due to domestic reasons (e.g. cleaning the country’s energy mix, energy security) as well as international ones (export of clean energy such as electricity and hydrogen to Europe). On the other end, there are countries like Oman, Kuwait, Bahrain and Algeria that have been less engaged with international climate policy. In the middle of the spectrum, there is Saudi Arabia which has always had an ambivalent relationship with the issue. It has been accused of obstructing progress and undermining political ambition within the UN international climate change negotiations, while it has stepped up its ambition in terms of renewable energy targets (Luomi 2020).

A shared approach to climate actions has emerged over the past decade within the region and particularly in the Gulf and oil producing countries. While the Gulf countries have tried to intertwine domestic climate actions and economic plans, they have downgraded climate change to an environmental issue to be managed by dedicated departments within environmental ministries or agencies (Luomi 2020). This dual approach illustrates the essence of the challenge for climate change policy. Although big emitters make commitments to fight global warming, it has proven difficult to translate these commitments into actual and collective action. The international sphere collides with domestic politics and constraints, especially in those countries that rely heavily on hydrocarbons for their economy and/or energy sector. In this sense, MENA countries are particularly illustrative. Climate change mitigation requires considerable investment, while climate change adaptation may lead to substantial changes in the current socioeconomic and energy models of MENA countries, posing a serious threat to their domestic political stability.

All MENA countries are parties to the UNFCCC and its legally binding instrument, the Kyoto Protocol, and to the Paris Agreement. At the international level, the climate change policies of MENA countries have been characterized by an absence of strong domestic strategies; this is particularly true for Gulf countries (Luomi 2020). Generally, they have stressed their status as developing countries and their vulnerability to response measures, while prioritizing adaptation over mitigation as a policy option.

Under the Kyoto Protocol, MENA countries have been considered as developing countries with no commitments for GHG emissions reduction. Some Gulf countries have also tried to seize monetization opportunities with Pre-Paris mitigation projects, such as the Kyoto’s Protocol’s CDM. In this sense, oil producing countries have sponsored carbon capture and storage (CCS) as a viable solution. The six Gulf states collectively have 27 projects (15 in the UAE, six in Saudi Arabia, and two each in Kuwait, Oman, and Qatar), comprising 0.6% of Clean Development Mechanism projects registered worldwide in terms of size (Luomi 2020).

Under the 2015 Agreement, almost all MENA countries have submitted their NDCs. Through their NDCs, MENA countries have expressed their real ambitions on climate change. Of the six Gulf states, only Oman had set a quantitative emission reduction target (2% by 2030), while three Gulf governments had communicated no quantitative targets (Luomi 2020). The UAE are currently the only MENA country that has submitted its updated NDC in December 2020, which aims for a decrease in emissions of 23.5% below business as usual in 2030. Regarding mitigation measures, MENA NDCs refer normally to renewable energy, energy efficiency, and CCS. Some of the Gulf countries have framed mitigation contributions or actions in the context of economic diversification efforts. MENA countries announced mitigation contributions in the form of GHG targets, non-GHG targets, proposed actions or a combination of these elements (Griffiths 2017). The Gulf countries have not made any unconditional GHG emissions reduction commitments (Griffiths 2017). Generally, major oil exporting countries have mentioned their special status as countries highly dependent on fossil fuel export revenues, stressing the need to minimize the negative impacts of response measures (Luomi 2020).

In their NDCs, some Gulf countries, namely the UAE and Kuwait, refer to the fossil fuel subsidies reform. The Eastern Mediterranean countries (e.g. Israel, Jordan, Lebanon) have a different approach, having announced unconditional commitments, with Israel being the most ambitious with a reduction target of 26% by 2030 below the 2005 level (Griffiths 2017). The North African countries, with the exception of Egypt, have made at least some form of unconditional commitment (Griffiths 2017). Syria has submitted its NDC only in 2018 given its critical conditions caused by the 10-year civil war. The other war-torn nation, Libya, has not yet submitted its NDC. The lack of ambitious unconditional commitments within the NDCs of MENA countries shows how these countries call for international support and financing in order to pursue an emissions reduction policy—especially those countries that are highly dependent on hydrocarbon revenues.

The year 2021 was particularly relevant for climate policies in the MENA region as three countries pledged to reach net-zero emissions by and around mid-century: the UAE by 2050, while Saudi Arabia and Bahrain by 2060. As a result, two distinct groups have emerged regarding climate ambitions: on one side, higher ambition, high-emission group of mainly oil and gas exporters, and on the other hand lower ambition, low emission group of mainly developing countries (Elgendy 2022). These two groups reflex a geographical distinction with the former generally located in the GCC countries (plus Morocco) and the latter located in North Africa. The two groups own also different financial capabilities to pursue and implement such plans, with Gulf countries holding massive financial reserves while North African countries facing fiscal tightness. Nonetheless, all MENA countries have submitted their first NDCs, except Libya which is not ratified the Paris Agreement. As of end of 2022, around ten countries have submitted their updated NDCs, while Morocco, Tunisia, Oman and the UAE have submitted their second NDCs (World Bank 2022).

Climate targets and policies have been boosted by the COVID-19 crisis as a part of economic recovery plans. Moreover, there has been a greater political willingness to act on climate. Some major developments are happening also in the MENA region even though it is home to major oil and gas producers. Ahead of COP26, the UAE had launched its plan to achieve net-zero emissions by 2050 in October 2021. Moreover, it would oversee $163 billion in investment in renewables making it the first country in the region to pledge to achieve carbon neutrality. A few weeks later, Saudi Arabia affirmed its plan to become carbon neutral by 2060. During its G20 presidency, Saudi Arabia launched its Circular Carbon Economy in 2020. These two countries seek to develop several low-carbon technologies such as renewables, hydrogen (both green and blue) and CCUS, exploiting their competitive advantages in order to adapt and adjust their economy to a low-carbon future. At the same time, they are still committed to remaining big oil players in the foreseeable future. In the same period, another MENA country has joined the net-zero club: Bahrain, which announced its pledge to reach net-zero emissions by 2060. To achieve its goal, Bahrain will adopt a circular carbon economy, strengthened by various offsetting schemes including CCS technology and afforestation. Since 2021, MENA countries have increased their climate targets following the global steep acceleration in net-zero ambitions, but increased focus and bold action is needed to translate such growing, ambitious commitments into projects and actions.

In conclusion, climate change represents a major external driver for the energy transformation of MENA countries. Climate change has shaped international politics, as governments have increasingly committed to fighting climate change and achieving decarbonization. The ever-growing consensus, combined with a deeper scientific knowledge of the harm caused by climate change, has led to the formation of the international climate change regime, which forces MENA countries to act in collaboration with all the other countries. Moreover, climate change is expected to further exacerbate some of the existing challenging conditions that MENA countries must deal with: rising air and water temperatures, water scarcity, desertification and so on. These conditions have a direct impact also on the energy sector.

In compliance with the international climate change regime and pushed by the domestic dimension of climate change, MENA countries have submitted their climate plans (NDCs). Oil-producing countries have often combined climate change actions with their need to diversify their domestic economy, while others have set more ambitious reduction plans.

6.3 Oil and Natural Gas Demand in a Decarbonized World: Peak Demand for Oil and More Pressure for Natural Gas

The ever-growing international political commitment towards decarbonization will have profound consequences for fossil fuels demand in the coming decades. MENA oil and gas exporting countries need to transform their business model or they will face severe economic losses, which could also cause social instability. A net-zero scenario will cause a drastic drop in fossil fuels demand by mid-century despite some uncertainty over fossil fuels demand. To testify the strong political pressure on fossil fuels, the IEA released a roadmap for the global energy sector in May 2021, called ‘Net Zero by 2050’. The report analyzes how to transition to a net zero energy system by 2050. In this report, the IEA claims that there are no new oil and gas fields approved for development beyond projects already committed as of 2021. In October 2021, ahead of the COP-26 in Glasgow, the IEA released its World Energy Outlook (IEA 2021a) where it compares four scenarios (IEA 2021a):

• The Net Zero Emissions by 2050 Scenario (NZE) shows, according to the IEA, a “narrow but achievable pathway for the global energy sector to achieve net zero CO₂ emissions by 2050”, with advanced economies reaching net zero emissions in advance of others. This scenario also meets key energy-related United Nations Sustainable Development Goals (SDGs), in particular achieving universal energy access by 2030. The NZE does not rely on emissions reductions from outside the energy sector to achieve its goals, but assumes that non-energy emissions will be reduced in the same proportion as energy emissions. It is consistent with limiting the global temperature rise to 1.5 °C without a temperature overshoot (with a 50% probability).

• The Announced Pledges Scenario (APS) takes account of all of the climate commitments made by governments around the world in advance of the COP-26, including Nationally Determined Contributions as well as longer term net zero targets, and assumes that they will be met in full and on time. The global trends in this scenario represent the cumulative extent of the world’s ambition to tackle climate change as of mid-2021. The remaining difference in global emissions between the APS and the goals in the NZE or the Sustainable Development Scenario shows the “ambition gap” that needs to be closed to achieve the goals agreed upon in the Paris Agreement in 2015.

• The Stated Policies Scenario (STEPS) does not take for granted that governments will reach all the announced goals. Instead, the STEPS explores where the energy system might go without the implementation of additional policies beyond the ones already implemented (or under development). As with the APS, it is not designed to achieve a particular outcome. It takes a granular, sector-by-sector look at existing policies and measures and those under development. The remaining difference in global emissions between the STEPS and the APS, represents the “implementation gap” that needs to be closed for countries to achieve their announced decarbonization targets.

• The Sustainable Development Scenario (SDS) is a “well below 2 °C” pathway, and represents a gateway to achieving the outcomes targeted by the Paris Agreement. The SDS assumes all energy-related SDGs are met, all current net zero pledges are achieved in full, and there are increased efforts to realize near-term emissions reductions; advanced economies reach net zero emissions by 2050, China around 2060, and all other countries by 2070 at the latest. Without assuming extensive net negative emissions, this scenario is consistent with limiting the global temperature rise to 1.65 °C (with a 50% probability). With some level of net negative emissions after 2070, the temperature rise could be reduced to 1.5 °C in 2100.

Fossil fuels are expected to decline drastically in a decarbonized world, even though oil and natural gas will decline at different rates.

As shown in Fig. 2.7, global oil demand, which had reached its record level of 97.6 mb/d in 2019 before falling to 88.5 mb/d in 2020 during the shutdowns of the first Corona year, is expected to reach by 2050 a level of 45 mb/d (− 54% compared to 2019) in the SDS and even down to 21 Mb/d (minus 78.5%, or compared to 2019) in the NZE. The sharp decline will be mainly driven by significant changes in the transport sector as electric vehicles will gain an increasing market share, especially in countries with net zero pledges.

Fig. 2.7

Source Authors’ elaboration on IEA data of the WEO 2021

Future oil demand under IEA scenarios (mb/d).

In the STEPS scenario oil demand would remain at around 100 mb/d up to 2050, but this is a counterfactual scenario. Taking account of the pledges proposed for the COP-26 in Glasgow as of mid-2021, oil demand by 2050 would already be 26% lower than in the STEPS. These pledges have already been reinforced as the COP-26 came closer, and will again be reinforced at the COP-27 in Sharm el-Sheikh in 2022, and again later. It is clear that the policy is to move towards some carbon neutrality by mid-century. The planet might indeed not achieve carbon neutrality by mid-century, but this is the clear direction towards which policies are increasingly moving worldwide. In other words, the stated policies’ and the announced policies’ scenarios will bend a bit downwards year after year towards the SDS and NZE scenarios.

Oil is thus expected to become less and less relevant as a result of growing decarbonization policies and technological developments in oil demand-driving sectors such as transport (i.e. electric vehicles). In recent years, attention has moved from the concept of ‘peak oil supply’ to ‘peak oil demand’. Peak oil demand consists of a decline of global oil demand in the relatively near term. The scale and pace of the declining role of oil is driven by a combination of climate policies (e.g. improvements in energy efficiency, greenhouse gas emissions limits, carbon pricing) and the development of technological solutions (e.g. expansion of EVs). In SDS, Middle East⁴ oil production is expected to fall from some 30 mb/d in 2019 to some 18 mb/d by 2050, a reduction of 40%. At the same time, the global market share will increase from some 31% of today to 38% by 2050.

Natural gas demand has a different, yet also challenging, future (Fig. 2.8). The IEA foresees that in decarbonization global natural gas demand remains roughly stable at around 3860 bcm (the 2020 level) up to 2030 as on the one side it will be challenged by increased energy efficiency in all sectors as well as the strong continuation of renewable energy penetration in the power sector, and on the other side it will partly replace coal for power generation and the industry. Indeed, burning coal in power plants emits twice as much CO₂ for every kWh produced compared to burning natural gas. After 2030, the global demand for natural gas (in particular for unabated natural gas) should decline rapidly. By 2050, natural gas demand is expected to reach around 2367 bcm (minus 39% compared to 2020) in the SDS and 1686 bcm (minus 56% compared to 2020) in the NZE. In NZE, natural gas demand falls largely in all regions, except those that are currently heavily reliant on coal, where natural gas largely displaces coal.

Fig. 2.8

Source Authors’ elaboration on IEA data

Future natural gas demand under IEA scenarios (bcm).

For the outlook for natural gas a key driver is the degree of coal-to-gas switching. Its potential varies across sectors and regions. Moreover, it depends on the pace and scale of emissions reductions plans undertaken at the national level. Due to higher economic and demographic growth, natural gas could experience a longer future especially in developing Asia, Africa and the Middle East.

Natural gas has enjoyed the status of ‘transition fuel’ as it is the least polluting fossil fuel, making the outlook for natural gas more durable than for oil. Natural gas plays and is expected to continue to play a crucial role in supporting fast-growing developing economies as they decarbonize and reduce their reliance on more polluting fuels, notably coal. Natural gas is also expected to enjoy some gains in the short- and medium-term in some developed countries as they are phasing out of coal and sometimes also nuclear. Nonetheless, unabated natural gas is expected to be under more and more pressure in a fully decarbonized world.

Despite generating less CO₂ than coal, unabated gas releases methane (CH₄) which is a potent GHG. Methane released directly into the atmosphere is 80 times more potent than CO₂ over a 20-year time period. The sixth IPCCC report notes that to limit global warming to 1.5 °C, a deep reduction in emissions of methane must be achieved over the 2020 decade. As methane’s atmospheric lifespan is relatively short, a fall of methane emissions can yield the most immediate reduction in the rate of warming. On November 2, 2021 at the COP-26 in Glasgow, the EU, the US and over 100 countries launched the Global Methane Pledge. Under this initiative, these countries, which represent 70% of the global economy and are responsible for nearly half of anthropogenic methane emissions, commit themselves to a collective goal of reducing global methane emissions by at least 30% by 2030 from 2020 levels.

In decarbonization scenarios, gas use will progressively need to be CO₂ abated, thus either in form of carbon neutral hydrogen, biogas or natural gas with CCUS. Figure 2.9 presents the penetration of CCUS associated to natural gas demand in the different scenarios. As can be seen, deep decarbonization scenarios require high volumes of CCUS. Starting from almost nothing today, CO₂ abated natural gas production with CCUS is expected to reach by 2050 717 bcm in the SDS and 1200 bcm in NZE. Therefore, while in the SDS by 2050, 70% of demand will still be constituted by unabated natural gas and 30% by CCUS abated natural gas, in the NZE—which has a 30% reduced remaining demand for natural gas by 2050 compared to the SDS scenario—the proportion is the other way round: 70% CCUS abated natural gas and 30% unabated natural gas. CCUS thus allows partial offsetting of the needed general decline in natural gas production post 2030. In fact, in the NZE, by 2050 a total of 7.6 Gt CO₂ will be captured, almost 50% of which from fossil fuel combustion, 20% from industrial processes, and around 30% from bioenergy use with CO₂ capture and direct air capture (DAC).

Fig. 2.9

Source Authors’ elaboration on IEA data

Demand for unabated natural gas and gas with CCUS under IEA scenarios (bcm).

There is some upside for natural gas demand in the NZE as a result of its role in scaling up low-carbon hydrogen production: by 2030, around 250 bcm will be used in steam methane reformers equipped with CCUS. After 2030, natural gas use in the power sector in NZE will decline globally by more than 80%. By 2050 less than 190 bcm of natural gas will be used for power generation in NZE, accounting for around 1% of electricity generation worldwide (compared with almost a quarter today), mostly equipped with CCUS. Energy demand in buildings will also transition quickly away from natural gas. In 2050, more than 50% of global gas production will be used to produce low-carbon hydrogen; a further 15% in the industrial sector, mainly for cement production and in light industries.

In NZE, in 2050, about half the global gas will be produced in the Middle East and Russia. According to this deep decarbonization scenario, the Middle East production of natural gas would fall from around 650 bcm in 2019 to some 400 bcm in 2050, representing a quarter of the global natural gas supply (another quarter is expected to be supplied each by Russia and the US—the balance by Africa and the rest of the world). Therefore, even though overall production in the Middle East would decline, its market share on a worldwide scale would increase from 14% of today to 24% by 2050. Still according to NZE, interregional trade of natural gas will fall to less than 300 bcm, around 40% of current levels.

From today’s perspective, NZE seems an extremely ambitious scenario. SDS still seems very ambitious but more likely to be achieved. According to SDS, Middle East⁵ gas production is expected to increase from around 650 bcm in 2019 to 740 bcm by 2030, but then to fall to 580 bcm (a quarter of the world total) by 2050.

To conclude, if we assume the world to progressively implement decarbonization scenarios, global oil and gas demand will need to fall over the next decades. Compared to oil, the fall in gas demand will be less rapid and less dramatic. Due to the important reserves and low production cost of the MENA region, the market share of this region is expected to increase, even though their absolute exports will nevertheless fall importantly.

This explains the pressing need to transform and diversify the economies of these countries. The advantage these countries have is that hydrocarbon revenues, if well used, will provide the financial resources necessary for this transition.